2013 SD office market performance mixed

Related Special Reports

San Diego County's office market improved in 2013, depending which brokerage firm is doing the assessing, though most are predicting a better 2014.

Cassidy Turley said demand for office space in the next two years will reach some 3.5 million square feet.

CBRE (NYSE: CBG) reported that for the first time in 17 quarters, the county's office market experienced a negative net absorption in the fourth quarter.

It reported about 116,000 square feet of space was returned to the market, primarily in downtown San Diego and Sorrento Mesa.

While the county experienced negative absorption for the fourth quarter, CBRE pegged the overall 2013 net absorption at more than 1.05 million square feet.

Not every survey agreed with CBRE.

By Colliers' International's accounts, there was nearly 402,000 square feet of net absorption in the fourth quarter alone and 784,798 square feet for 2013.

According to CBRE Executive Vice President Louay Alsadek, the office market has improved dramatically in recent years, will continue to perform, and isn't worried about what he views to be temporary blips.

“We expect buyers to remain bullish, recognizing that quarterly activity can be skewed relative to the overall direction of the market,” Alsadek said. “Office employment has maintained a steady pace of growth which bodes well for the San Diego office market in general.”

CBRE added that in some cases, office rents are at or near what they were before the recession.

The brokerage pegged the Del Mar Heights monthly rate at $3.94 per square foot -- not far off from the slightly more than $4 level before the recession.

The CBRE report also said net absorption will average 837,600 square feet per year for the next five years, while new deliveries will amount to an average of 693,000 square feet.

Cushman & Wakefield reported that nearly half of the net absorption for the 2013 was a result of move-ins at two completed build-to-suit projects.

These are The FBI moving into its newly constructed 248,882-square-foot field office and Qualcomm (Nasdaq: QCOM) expanding into a new 250,000-square-foot building at its campus, both in Sorrento Mesa.

By Cushman & Wakefield's accounts, with slow but steady improvement, direct office vacancy dropped to 11.6 percent at the end of 2013 -- compared to 12.6 percent in 2012 and 14.2 percent in 2011.

"Although select core submarkets have boasted single-digit direct vacancy rates for more than 12 months, the total countywide Class A direct vacancy dropped below 10 percent for the first time since 2006, ending 2013 at 9.2 percent," Cushman & Wakefield reported.

In spite of political and economic uncertainties, the San Diego office market continues on its road to recovery," Jones Lang LaSalle (NYSE: JLL) wrote. "Leasing activity is expected to increase over the next year due in part to the growing demand of tenants in the technology industry and projected employment growth in other traditional office-using industries, such as professional and business services."

While speculative office projects are few and far between, The Irvine Company is expected to break ground this year on the 306,000-square-foot La Jolla Centre III building in the University Towne Centre area -- assuming it can obtain sufficient pre-leasing.

A few of the more significant planned speculative projects are Kilroy Realty’s (NYSE: KRC) 180,000-square-foot Pacifica development in Sorrento Mesa and the 74,500-square-foot The Heights at Del Mar.

As for current construction, Qualcomm’s Pacific Heights development in Sorrento Mesa, will feature a total of 424,000 square feet between two buildings is slated for completion later this year.

Although the buildings are classified as owner-user and not included in CBRE’s office stats, they still reflect a significant impact on Sorrento Mesa, as hundreds of thousands square feet of space becomes available.

Cushman & Wakefield further noted that 188,000 square feet became available for lease in the Wateridge Plaza building in Sorrento Mesa in the fourth quarter, when American Specialty Health announced it would be leaving for the Midwest in mid-2014.

LPL Financial’s (Nasdaq: LPL) 415,000-square-foot project at La Jolla Commons in the UTC submarket and Latham & Watkins’ 70,000-square-foot building in Del Mar Plaza in Del Mar Heights will also be completed in 2014.

CBRE noted that by the end of the year more build-to-suits were under way -- most notably the planned 330,000-square-foot Sempra Corporate headquarters being constructed in the East Village.

What is good news for Sempra Energy (NYSE: SRE) could be difficult for 101 Ash owner Sandor Shapery, when his tenant leaves in about two years.

Along with Latham & Watkins leaving downtown, KNSD Channel 39 has been looking at Kearny Mesa while announcing its intention to move out of about 24,000 square feet at 225 Broadway.

Earlier in 2013, approximately 140,000 square feet of Amylin Pharmaceuticals’ (Nasdaq: AMLN) space was put on the market for sublease in the UTC submarket.

On the plus side, Cassidy Turley noted that Rady Children’s Hospital will occupy 80,281 square feet of Class B space off Frost Street in Kearny Mesa, and Kleinfelder (an architecture and engineering firm) will take 42,933 square feet of Class A space at 550 Corporate Center, located at 550 West C St. in downtown San Diego.

These leases were signed in 2013, but will not be counted in net absorption when the tenant moves in during this quarter.